Original scientific paper
https://doi.org/10.1080/1331677X.2017.1305770
The role of financial constraints on precautionary cash holdings: evidence from Pakistan
Qurat-ul-ann Azmat
Abdullah Muhammad Iqbal
Abstract
This study aims to investigate the direct relationship between
precautionary cash holdings, cash flow volatility and the financial
constraints of Pakistani firms for the period 2003–2013.The study
also takes into account the 2008 financial crisis. This study seeks to
discover that if a firm is financially constrained and its cash flows are
highly volatile then it will increase its cash holdings and voluntarily
reduce its current investment level due to the intertemporal trade-off
between current and future investments. Thus, a positive relationship
between cash holdings and future cash flow volatility and a negative
relationship between current investments and future cash flow
volatility is expected. In order to test the impact of cash flow volatility
firms are classified in to constrained and unconstrained groups on
the basis of four criteria, i.e., firm size, dividend payment, Kaplan-
Zingales (KZ) index and group affiliation. For each criterion estimation
is done by using two steps Generalised Method of Moments (GMM)
estimator. Results show that financially constrained firms increase
their cash holdings when cash flow volatility increases while financially
unconstrained firms do not, except for KZ index criteria. It is also found
that during the 2008 financial crisis constrained firms were more prone
to saving cash than unconstrained ones. The study provides important
insights into understanding the behaviour of Pakistani firms relating
to cash holdings when they are financially constrained and cash flows
are highly volatile. This is the first study of its kind that establishes a
conclusive relationship between precautionary cash holdings, cash
flow volatility and financial constraints in a Pakistani context.
Keywords
Cash holdings; cash flow volatility; financial constraints; financial crisis; panel data; Generalised Method of Moments (GMM)
Hrčak ID:
180894
URI
Publication date:
1.12.2017.
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